Move afoot to ease norms for VC funding in startups

Out of the sanctioned amount, Rs 114 crore has been released to five VC funds. The government is hoping the move will encourage more VC funds to invest in startups.Ruchika Chitravanshi | ET Bureau | March 20, 2017, 07:59 IST

Industrial Policy and Promotion has moved a cabinet note that seeks to ease venture capital funding norms for startups and relax the definition of a startup to include older biotechnology and medical device companies.

The DIPP has suggested these changes be incorporated under Startup India Action Plan, the Narendra Modi-led government’s flagship initiative for nurturing innovation. A senior government official told ET that VC funds will be more willing to finance newer ventures if they are able to spread their risks. The DIPP has proposed that VC firms where government holds a stake be allowed to invest a part of their corpus in firms other than startups, the official said.

“This has been one of the reasons why VC funds have not reached out to startups as we expected. They have to be allowed to hedge their risks,” the official said. Last year, the government had approved a Rs 10,000-crore ‘fund of funds’ for startups, which requires VC firms to limit their exposure only to startups.

But officials said a little diversification will allow these funds to balance the risks of funding new ideas. The fund of funds was set up to support innovation-driven startups. Managed by SIDBI, it seeks to invest in other funds that will, in turn, invest in innovative ideas. The entire corpus will be released in two cycles by 2025. So far,Rs 129 crore has been sanctioned by SIDBI to various VC funds.

Out of the sanctioned amount, Rs 114 crore has been released to five VC funds. The government is hoping the move will encourage more VC funds to invest in startups.

Biotech & medical devicesThe DIPP has also suggested that the maximum age for classifying a biotechnology or a medical devices firm as a startup be raised to 8-10 years from the current five years.

This has been sought on grounds that companies in these two sectors have a longer gestation period. To promote biotech firms, the government already offers Rs 1 crore to bio-incubators under the Biotech Equity Fund. A total of 20 bio-incubators have been supported by the department of biotechnology so far. Nearly 350 startups have received benefits from these bioincubators under programmes such as Biotechnology Ignition Grant, Industry Innovation Programme on Medical Electronics (IIPME), Sparsh, Grand Challenges and BioNEST.

In order to ease processes for startups, the DIPP has also written to the corporate affairs ministry to notify startups as ‘fast track’ firms, which will allow them to wind up their business within 90 days. So far, the DIPP has recognised 713 startups out of 1,835 applications it received.